Darya Yuferova

I study the effect of algorithmic trading on the strategic choice of informed traders for market versus limit orders. I proxy for this choice by means of intraday return predictability from market and limit orders around the NYSE Hybrid Market introduction. My findings show that the increase in algorithmic trading by 16% leads to an increase in informed trading through both market and limit orders at the inner levels of the limit order book by 3.5% and 6.2%, respectively. The change in the informativeness of different order types depends on the change in the competition among algorithmic traders.

We examine the strategic behavior of High Frequency Traders (HFTs) during the pre-opening phase and the opening auction of the NYSE-Euronext Paris exchange. HFTs actively participate, and profitably extract information from the order flow. They also post "flash crash" orders, to gain time priority. They make profits on their last-second orders; however, so do others, suggesting that there is no speed advantage. HFTs lead price discovery, and neither harm nor improve liquidity. They "come early to the party", and enjoy it (make profits); however, they also help others enjoy the party (improve market quality) and do not have privileges (their speed advantage is not crucial).

We study intraday, market-wide shocks to stock prices, market liquidity, and trading activity on international equity markets and test recent theories on “endogenous liquidity” effects. Shocks to prices are prevalent and large, with rapid spillovers across markets. Price shocks appear to be predominantly driven by information; they do not revert and are often associated with macroeconomic news. Liquidity shocks are typically isolated and temporary. There is little evidence that liquidity effects exacerbate price shocks or foment non-fundamental contagion. The results cast doubt on the notion that liquidity has a central role in the origination and propagation of financial market upheavals.

We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to price discovery and liquidity provision in the subsequent opening call auction. We empirically investigate these questions using a unique dataset based on server IDs provided by the Tokyo Stock Exchange (TSE), one of the largest stock markets in the world. Our data allow us to develop a more comprehensive classification of traders than in the prior literature, and to investigate the behavior of the different categories of traders, based on their speed of trading and inventory holdings. We find that HFTs dynamically alter their presence in different stocks and on different days; therefore, we focus on HFT activity only when traders utilize their low-latency capacity. We find that, in spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to price discovery. They also contribute to liquidity provision in the opening call auction. In line with the previous literature, we also document that HFTs contribute to price discovery and are liquidity consumers during the continuous period. However, this result is driven by the three quarters of HFTs that were inactive in the pre-opening period. In contrast, those that were active in the pre-opening period contribute to liquidity provision in the subsequent continuous session. This indicates that, while HFTs contribute to both price discovery and liquidity provision, there is considerable heterogeneity in their contributions to both.

We study the role of various trader types in providing liquidity in spot and futures markets based on complete order-book and transactions data as well as cross-market trader identifiers from the National Stock Exchange of India for a single large stock. During normal times, short-term traders who carry little inventory overnight are the primary intermediaries in both spot and futures markets, and changes in futures prices Granger-cause changes in spot prices. However, during two days of fast crashes, Granger-causality ran both ways. Both crashes were due to large-scale selling by foreign institutional investors in the spot market. Buying by short-term traders and cross-market traders was insufficient to stop the crashes. Mutual funds, patient traders with better trade-execution quality who were initially slow to move in, eventually bought sufficient quantities leading to price recovery in both markets. Our findings suggest that market stability requires the presence of well-capitalized standby liquidity providers.